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This guest blog post was written by Mike Hoban of Hoban Communications.

Fueled by one of the strongest economies in the nation, the Boston commercial real estate market should continue to thrive for the foreseeable future. That was the conclusion of the enthusiastic panel at the 2017 NAIOP/SIOR Annual Market Forecast held last week at the Westin Waterfront Hotel before a crowd of 450 CRE professionals.

Moderated by David Begelfer, CEO of NAIOP Massachusetts, the panel included Molly Heath, Executive VP, JLL (Cambridge); Ben Sayles, Director, HFF (Capital Markets); John Carroll, Executive VP, Colliers International (Suburbs); Ron Perry, Principal, Avison Young (Downtown); and JR McDonald, Executive Managing Director, Newmark Knight Frank (Industrial). Barry Bluestone, Professor of Public Policy at Northeastern University and Senior Fellow at The Boston Foundation, set the table for the program with an economic forecast that – with one major caveat – bodes well for the long-term health of Greater Boston CRE.

Bolstered by the highly educated workforce provided by the educational and medical institutions located in Greater Boston, the Massachusetts economy has outperformed the U.S. economy nearly every year since 2009. GDP growth for the Commonwealth has generally been in the 2.5 to 3.0 percent range since 2010, a figure that is significantly above the national average of 2.0 during that period. The Bay State has added 355,600 jobs since the recession (including 62,500 last year), an 11.2 percent increase since 2009. The 4.2 percent unemployment rate has led to virtual full employment, and with the tight labor markets, average wages are beginning to increase, albeit slowly. And none of the factors that typically contribute to a slowdown are in evidence.

But despite the positive outlook, there is a looming threat to the overall health of Greater Boston economy, he cautioned. “The housing stock is limited and growing too slowly to meet the demand, and as a result, home prices and rents continue to rise,” said Bluestone, who is one of the co-authors of the Boston Foundation’s 2017 Greater Boston Housing Report Card. The price of housing is pushing workers farther away from the urban core, causing housing prices in traditionally affordable communities to escalate, as well as putting a strain on an overburdened public transit system. The Housing Report Card estimates that the region will need an additional 160,000 housing units by 2030 to accommodate its expanding population (an additional 342,000), “and that is going to be a challenge,” Bluestone concluded.

JLL’s Heath led off the program with an overview of the Cambridge office and lab markets. “The Cambridge market is one of the strongest markets that we track globally at JLL, and it continues to be driven by this incredible demand from the tech and life science clusters,” she stated, adding that the demand is coming not only from organically grown companies, but outside firms seeking to establish an R&D presence in close proximity to MIT, Harvard, and the educated workforce. With a vacancy rate below 3.0 percent, there continues to be upward pressure on rental rates, with office (by 13 percent) and lab (23 percent) soaring well above previous highs. Achieved rents for office space in E. Cambridge are now in the low $90’s (gross), with lab space in the low $80s (NNN). And due to the lack of supply in the market, “we really do believe that there is room (for rents) to run,” said Heath.

Colliers’ Carroll reported that “the suburbs are alive and well”, as the market has added over five million SF of positive absorption since the downturn. There has also been a steady increase in rent growth in the Class A office market, approximately 10 percent since 2009, with new construction in Waltham achieving rents in the low $50s. The Class B market is not faring as well (although there is some rent growth occurring in select markets), with some of the older building stock being slated for repositioning or demolition to make way for senior living, hotel and other non-office uses (including 450,000 SF of properties in Chelmsford). One particularly bright spot is the emergence of biotech in the suburbs. The Gutierrez Company is currently constructing a five-story, 350,000 SF building for EMD Millipore (2018 Q3 completion) in Burlington, Alkermes is “close to signing” a lease for a 250,000 SF build-to-suit in Waltham, and Waltham-based Tesaro is in the market for a 300,000-500,000 SF suburban campus.

Citing the enormous amount of commercial, residential, retail and restaurant development underway in the Seaport and other Boston locations, Avison Young’s Perry observed that “Boston is clearly a different city today than it was even five years ago.” The in-migration to the city by firms seeking talent continues, he said, citing the recent relocations by Reebok, PTC and Alexion to the Seaport, as well as Amazon’s establishment of a Boston presence with the 150,000 SF lease at 253 Summer St. and Rapid7’s relocation to North Station. Demand remains strong Downtown, with over 4.5 million SF of requirements in the market, including nine companies seeking 100,000-500,000 SF. CBD Class A rents range from the mid $40s to the mid $80s (Back Bay high-rise), and vacancy rates in the top floors of the towers (10 percent) are nearly in equilibrium with the lower floors (9.4 percent), as tech companies continue to absorb space on the lower tiers.

NKF’s McDonald reported on the industrial market – the newfound darling of investors and developers – noting the transformational effect that Amazon and e-commerce has had on the product type. With 12.8 percent average annual returns to investors over the last five years, industrial has outperformed both retail (12.1) and multifamily (9.9), driven by feverish demand for “last mile” properties located in urban and infill submarkets. That demand has driven rents “way beyond the norms” of what had traditionally been $5 to $6 psf to the “high single digits and low teens” for buildings such as 480 Sprague St. in Dedham, a 234,000 SF warehouse that straddles the Boston line. And warehouse space located within the urban market, such as 202 Southampton St. in the South End (which lacks basics such as air-conditioning), is fetching $20 psf, based solely on location.

HFF’s Sayles addressed the ‘When will the cycle end?’ question early on his presentation. “End of cycle concerns have largely abated,” he reassured the gathering. “Nobody is really talking about that right now, instead, what people’s biggest concern is, ‘If I sell, what am I going to do with that capital?” He expects pricing for assets to remain flat in the near term with cap rates trending downward. Financing for assets is up by 17 percent from Q3 2016 to Q3 2017, but investment sales for that period declined by approximately 8.0 percent as buyers are choosing longer term holds. Sales volume for Boston is expected to be approximately $13 billion for 2017, with foreign capital again accounting for a significant portion of those transactions.

Begelfer was in full agreement with Sayles’ assessment of the cycle concerns. “Boston is pretty unique. There are only a handful of cities around the country that are experiencing this kind of strong growth,” he observed. “Any slowdown that we see is probably not going to come from the economy, it will be from the cost of construction and land costs, or the pricing of assets. It won’t be caused by a recession, but by our own success,”

The Commonwealth exhibited very strong employment and earnings growth during the third quarter.

Payroll employment grew at a 2.1% annual rate in Massachusetts in the third quarter.

Wage and salary income in Massachusetts grew at a very robust 10.5% annual rate (vs. 3.8% growth for the nation).

Wage and salary income grew 5.8 percent year over year in the Bay State, significantly stronger than the estimated 2.7 percent growth for the nation.

“Labor markets appear to be nearly back to full employment levels,” noted Alan Clayton-Matthews, MassBenchmarks Senior Contributing Editor and Associate Professor of Economics and Public Policy at Northeastern University.

“Despite these low unemployment rates and anecdotes about a shortage of workers, employment growth continues unabated without clear signs of wage rate pressures. However, It may be that the rapid growth in wage and salary income in Massachusetts is signaling the beginning of an acceleration in wage rates, but it’s too early to tell.

As measured by regular sales tax receipts and motor vehicle sales taxes, spending in the state has been surprisingly weak given strong income growth and the surging stock market.

Spending on taxable items declined in the third quarter by 3.3%. Year over year, this spending grew by a relatively paltry 1.7% between the third quarter of 2016 and the third quarter of 2017.

The MassBenchmarks Leading Economic Index shows that the state’s economy is expected to continue to grow at a moderately robust pace.

Being cautious is a prudent business characteristic these days, but the data still shows a healthy Massachusetts economy.

Since Amazon announced its plans to open a second headquarters location, the region has been abuzz, but, to date, the focus has been on real estate. Where can 8 million square feet of space be developed? Does it need to be in one location or multiple sites?

Amazon, however, is not really looking for space. It is looking for people. These are the skilled workers that fuel the local economy, due to the region’s exceptional ability to attract students and immigrants.

So, while we are spending so much time and effort to present the best site for Amazon’s real estate decision makers, we had better be equally as focused contemplating the human resource side. Where will Amazon’s workers come from? Will they be relocating from other areas around the country?

Reality paints a different picture. Other than the post 2009 recession years, Massachusetts has experienced consistent net domestic migration. We are currently close to full employment. There are few workers available and qualified for the jobs that are currently open. Therefore, it’s more likely that these Amazon workers will come from other local companies. The critical question is how will those companies survive and grow with an even tighter job market? Will they, in turn, be forced to relocate?

To make matters even more complex and challenging, there is a multiplier effect with a company like Amazon establishing a major local presence. Other companies will look to locate near this “mother ship” and many of the service companies in the area will have to bulk up to handle the additional demand. As a result, there may be a need for upwards of 150,000 more positions to fill over the next 10+ years.

The dog that chases the car, but then catches it, had better have a plan for what happens next. If we are serious about getting Amazon to choose Massachusetts, let’s strategize about what it would take to actually increase our labor force. As with the Olympics, planning for the possibility of success can be a beneficial, long term, strategic exercise. In any case, we should prepare ourselves for sustainable growth, whether, or not, any individual company locates here.

Three strategies for retaining more skilled workers and attracting others to come here should be pursued. The first deals with the issue of the high cost of living. The second is job training/retraining. The last is immigration policy.

The primary component of the cost of living is housing. We need to produce more affordable, urban housing, and also open up opportunities for “starter homes” for families in communities that are accessible to the new jobs and with good school systems. Schools, commuting time, and affordability are what drive home purchases (particularly for families). Unfortunately, local zoning in most of the Commonwealth discourages multi-family housing, as well as smaller, denser single-family homes.

As for job training, we will need to adapt our institutions and training pathways to help workers acquire new skills. We have not been sufficiently agile to respond to the needs of those businesses that are expanding and hiring. Even a college degree is not sufficient to guarantee a new job in the new economy. New training methods that can be adapted and adjusted in short order will be needed to fine tune a prospect’s skill set to match a company’s requirements. Lifelong learning that is priced right, available on demand, and responsive to the changing needs of the workplace must become the norm.

Finally, we have benefited greatly by the historic flow of immigrants. Were it not for immigration, we would not have accommodated the strong economic growth over the last 20 years. Local and state leaders must flex their political muscles to ensure that our national policies do not impede the beneficial impact that comes from a wide range of skills entering and fueling our economy.

Yes, we can benefit from a thoughtful strategy to attract Amazon to our region. But, over time, we will be well served with a realistic plan to increase our skilled workforce that will be the honey that easily attracts many more companies to locate and expand here.

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A study commissioned by the non-partisan economic development organization, MassEcon, and conducted by the UMass Donahue Institute‘s Economic and Public Policy Research group, was recently released. The good news is that the vast majority of companies that chose Massachusetts as a place to expand their business would do it again. This consensus was largely based on Massachusetts’ innovative economy, industry clusters, and skilled workforce.

As with all good news, there are some troubling challenges and concerns that were voiced by the businesses about future growth in the Commonwealth:

TRANSPORTATION: Companies in Greater Boston are concerned about highway congestion and public transit capacity, while businesses outside the urban core worry about a shortage of public transportation. MBTA reliability is vital to the ability to attract and retain workers, expressing concerns that not enough is being done to accommodate a growing population.

HOUSING: The availability and affordability of housing was a significant concern statewide, a challenge to attracting and keeping employees, especially younger employees. Costs in Greater Boston, in particular, are inordinately high, limiting options for low and middle-income workers.

BUSINESS COSTS: In general, for companies locating in Greater Boston the advantage of skilled labor outweighed various higher business costs; but labor, health care, and energy costs were identified as challenges to business in Massachusetts. Business costs seemed to be of less concern to those companies that considered and compared other states than to those already doing business in the Commonwealth. Companies engaged in manufacturing were more sensitive to cost challenges of health care and energy than companies in Greater Boston.

QUALITY OF FUTURE LABOR SUPPLY: Although more than 90 percent of survey respondents said the availability and quality of the workforce were important to their decision to locate in Massachusetts, some companies are struggling to find enough technically trained workers and those with middle-level skills. Continuing to produce talented labor must be a priority for the state, respondents indicated.

ECONOMIC DEVELOPMENT ASSISTANCE: While over half of the businesses surveyed were solidly favorable about the effectiveness of economic development officials in helping them become established in Massachusetts, others reported that the system is confusing. Some said they sought a “roadmap” with which to navigate the various economic development organizations.

The Commonwealth has been experiencing one of the best periods of economic growth in its recent history. The problem with success is that it sometimes breeds complacency. If we are to maintain and enhance our position as one of the best locations to grow a business, we had better heed the warnings and fix our own house before it begins to lose its luster against all the many worldwide competing centers for growth.

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The real estate industry is mourning the loss of an extraordinary professional, Howard Elkus, who passed away April 1st in Palm Beach, Florida. Howard co-founded the firm Elkus Manfredi Architects in 1988 in Boston, specializing in workplace design, large-scale developments, and urban planning. Under his and David Manfredi’s leadership, the firm has worked on signature projects throughout the United States and around the world.

Probably, no other firm has had such an impact on the cityscape of Boston over the last 10 boom years, while also spearheading major global commissions.

On its website on April 3, the firm released a statement:

“It is with great sadness that we share news of the unexpected passing of Howard Elkus. We grieve the loss of Howard as a co-founder of our firm, as a visionary architect, as a mentor, and as a friend. We extend our condolences to his wife, children, and immediate family. Information regarding conveying condolences and participating in remembrances is forthcoming. Our sincere appreciation for your concern and expressions of sadness.”

Howard was warm, creative, caring, and loved what he did. All of us who had the privilege of working with him will feel his loss on a daily basis, but we will always be reminded of his influence as we walk the city he loved.

Greater Boston’s real estate market has been on a bender – record-shattering sales, huge demand for office space in key submarkets such as Kendall Square and the Seaport and massive amounts of new luxury residential filling up in record time. But will these trends continue?

Solomon McCown and NAIOP Massachusetts teamed up on our first Real Estate Confidence Index to check the pulse of the industry and see if this run will continue – or are we “in the seventh inning?”

From a pool of more than 200 real estate industry respondents, 63 percent feel the Boston market is still rising (either quickly or slowly) and only ONE percent thinks we are already on the decline. Just about a third of respondents (31 percent) say we’ve plateaued. A whopping 76 percent have a positive outlook for our city just one year from now, with almost 56 percent continuing to be confident for the next three years.

See below to dig in on the confidence factors for the submarkets, new vs. existing construction and specific sectors. How confident are you? Let us know in the comments below, or on Twitter at @SMCRealEstatePR or @naiopma.

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NAIOP, its leadership, and its members all mourn the loss of Frank Wuest, a long time friend, past President, and avid supporter of NAIOP. We will miss his friendship, enthusiasm for life, and his upbeat attitude. To his family and friends, we give our deepest sympathies.

Frank Wuest died on Saturday, August 13, while participating in a fundraising swim in Narragansett Bay, Rhode Island. An avid and skilled swimmer, Frank was 56 years old, a native of Greenwich, CT, graduate of the University of Connecticut and Harvard Business School, and was President of Marcus Partners, having established a successful career in real-estate investment and development.

Passionate about Boston, its people, and its landscape, Frank loved leading the development of vibrant, mixed-income, mixed-use communities. His work included well known developments such as University Park at MIT and Radian in the Leather District of Boston, which he completed while at Forest City Enterprises, where he was for many years president of the Boston office and Head of the Science + Technology Divisions. He served on both the executive committee and board of directors of A Better City as well as the international advisory board of Harvard Business School’s Real Estate Academic Initiative. Mr. Wuest was the Vice Chair of the Advisory Board of the Boston District Council of the Urban Land Institute (ULI) and was a past President and long time member of the Board of Directors of the Massachusetts Chapter of NAIOP, the Commercial Real Estate Development Association. His kindness, intelligence, generosity, and quick smile will be missed greatly.

Frank became a committed long-distance swimmer in 1998, and was a beloved member of the Cambridge Masters Swim Club at Harvard. He was the recipient of many awards including United States Masters Swimming (USMS) Long Distance All Star, USMS Individual All-American, and many USMS Top-10 swims. Earlier this summer, Frank completed a 10,000M swim for time and was the top male finisher in the annual Charles River Swim.

Frank inspired those around him to do their best. A champion of family and time together, he never let a summer go by without a family reunion. He is survived by his wife, Lyn Duncan; two children, Sam Wuest and Allie Wuest and their mother MJ Vigneau; two stepchildren, Micki Duncan and Elias Duncan; his parents Gail and Frank Wuest of Connecticut, two brothers, Kirk of California and Chris of Connecticut, and his sister Avery Horne of Connecticut.

Funeral Mass and Life Celebration

A funeral mass will be held Saturday, August 20 at 11:00 am at St. Paul Church, 29 Mt. Auburn St., Cambridge, MA. An event celebrating Frank’s life will be held immediately following the mass at the Harvard University Murr Center. Because there is no parking at St. Paul Church, parking will be provided at the Harvard Stadium lot next to the Murr Center at 65 North Harvard St, Boston, MA 02163. Shuttle buses will provide transportation between the Murr Center and St. Paul Church before and after the service.

Immediately following the funeral Mass a luncheon reception and celebration will be held at the Harvard University Murr Center Hall of History, adjacent to the parking noted above.

In lieu of flowers, donations can be made to the Frank C. Wuest Memorial Fund, established through Fidelity’s Charitable Gift Fund. Details can be found below.